JOHANNESBURG — Short seller Viceroy Research has set its sights on South African bank Capitec in its latest report, marking the latest blow for Stellenbosch. Titling the report as ‘Capitec: A Wolf in Sheep’s Clothing’, the research briefly sent the bank’s stock price spiralling on the JSE before paring losses. Viceroy Research essentially has accused Capitec of reckless lending, comparing it to African Bank and detailing how “Capitec must take significant impairments to its loans which will likely result in a net-liability position”. If this report is anything like what Viceroy wrote about Steinhoff, then the blowout risks resulting in more shockwaves in days and weeks to come. In a response to BizNews, Capitec spokesperson Charl Nel said: “We have taken note of the Viceroy report on Capitec Bank. We are currently in the process of investigating the report in detail and will respond appropriately.” – Gareth van Zyl

Based on our research and due diligence, we believe that Capitec is a loan shark with massively understated defaults masquerading as a community microfinance provider. We believe that the South African Reserve Bank & Minister of Finance should immediately place Capitec into curatorship.

Capitec Bank Holdings Limited (JSE: CPI) is a South Africa-focused microfinance provider to a majority low-income demographic, yet they out-earn all major commercial banks globally including competing high-risk lenders. We don’t buy this story. Viceroy believes this is indicative of predatory finance which we have corroborated with substantial on-the-ground discussions with Capitec ex-employees, former customers, and individuals familiar with the business.

Viceroy’s extensive due diligence and compiled evidence suggests that indicates Capitec must take significant impairments to its loans which will likely result in a net-liability position. We believe Capitec’s concealed problems largely resemble those seen at African Bank Investments (JSE: AXL) prior to its collapse in 2014.

We think that it’s only a matter of time before Capitec’s financials and business unravel, with macro headwinds creating an exponential risk of default and bankruptcy.

This report will provide underlying information and analysis we believe supports the following conclusions:

Reconciliation of loan book values, maturity profiles and cash outflows imply Capitec is either fabricating new loans and collections, or re-financing ~ZAR 2.5bn – 3bn (US$200m-$240m) in principal per year by issuing new loans to defaulting clients.

Legal documents obtained by Viceroy show Capitec advising and approving loans to delinquent customers in order to repay existing loans. These documents also show Capitec engaging in reckless lending practices as defined by South Africa’s National Credit Act. This corroborates Viceroy’s loan book analysis.

As a consequence of re-financing delinquent loans, Viceroy believes Capitec’s loan book is massively overstated. Viceroy’s analysis against competitors suggests an impairment/write-off impact of ZAR 11bn will more accurately represent the delinquencies and risk in Capitec’s portfolio.

Legal experts that we have spoken to believe that the outcome of an upcoming reckless and predatory lending test case in March 2018 will be used to trigger a multi-party litigation refund (class action). We believe that, at a minimum, Capitec will be required to refund predatory origination fees primarily related to multi-loan facilities; an estimated ZAR 12.7bn.

Viceroy’s investigations suggest that Capitec’s prohibited and discontinued multi-loan facility lives on, rebranded as a “Credit Facility”. Former Capitec employees have corroborated this. Despite its perception as an affordable lender, Capitec’s implied interest rates are significantly true of the maximum allowable rates in South Africa.

South Africa’s microfinancing sector has been the graveyard of numerous Capitec competitors who chased the same meteoric growth Capitec displays, largely due to low acceptance and mass delinquencies. We see no operational difference between Capitec and its ill-fated predecessors, including African Bank.

Former employees consider the business to still be an outright loan-shark operation, where fees are key. Some former employees believe they were fired for not deceiving borrowers and failing to meet rescheduling targets on impaired/defaulting loans.

Jean Pierre Verster, chairman of Capitec’s audit committee, is/was indirectly short Capitec through Steinhoff. We believe this is an oversight, and understand Verster to be an excellent analyst on the short side. We encourage Verster to raise the concerns within this report to company auditors and recognize Capitec’s resemblance to his previous African Bank short.

Given what we believe is a massive overstatement of financial assets and income, together with opaque reporting of loan cash flow and reckless lending practices, we believe Capitec is simply uninvestable and accordingly have not assigned a target price.

Short seller who rode Steinhoff drop finds target in Capitec

By Franz Wild, Renee Bonorchis and Luca Casiraghi

(Bloomberg) — The short seller who wrote a damning report about accounting irregularities at Steinhoff International Holdings NV has found a new target in Capitec Bank Holdings Ltd., South Africa’s best-performing stock over the last decade. The shares fell the most in more than 15 years before paring losses.

Viceroy Research said in a report Tuesday that Capitec, which makes unsecured loans mainly to low- and middle-income households, may be concealing losses by refinancing loans that customers were unable to repay. Capitec may have to write down its loan book by 11 billion rand ($920 million) — equivalent to 14 percent of the bank’s assets — to “more accurately represent delinquencies and risk,” the report said.

Andre du Plessis, Capitec’s chief financial officer, said the allegations are “totally unfounded” and he’s not worried about them. He said he hadn’t seen a copy of the report.

“It’s very surprising that someone writes a report who knows nothing about us,” he said in an interview. “There’s a total lack of understanding of what we do.”

While Viceroy didn’t disclose whether it has a position in Capitec’s securities, it said readers of the report should assume that the authors could profit if the bank’s share price declines. Viceroy operated anonymously until earlier this month, when Fraser Perring revealed himself and two other colleagues — Gabriel Bernarde and Aidan Lau — as the faces behind the firm. Perring, 44, was a U.K. social worker before turning to shorting stocks on a full-time basis in 2012.

Shares Drop

Shares of Capitec fell as much as 20 percent, the most since June 2002, before paring losses to trade 0.9 percent down at 935 rand as of 10:06 a.m. in Johannesburg. The securities declined 4.1 percent on Friday and 8 percent Monday. Before the selloff, the stock had risen about 30-fold since 2008.

The way Capitec restructures loans “is known and clearly disclosed,” said Patrice Rassou, the head of equities at Sanlam Investment Management in Cape Town. “They have not been found guilty of reckless lending” and the quantum of a “write down will depend on whether they are struggling to collect their non-performing book.”

The valuation of Capitec, with a price-to-equity ratio of more than 20 times and price-to-book of more than six times means the stock was “very elevated and yet many sell side analysts were positive on the stock,” Rassou said.

Founded in 1999, Capitec has grown to become South Africa’s sixth-biggest publicly traded bank by assets, increasingly competing against the largest financial institutions as it branches into consumer banking.

Capitec’s largest owner, with a stake of more than 30 percent, is investment firm PSG Group Ltd. Steinhoff, in turn, was the second-biggest shareholder in PSG until last week, when it cut its shareholding to 2.5 percent from 16 percent.

Capitec is the second South African company to come under scrutiny from Viceroy, which highlighted concerns with the accounting policies of retail giant Steinhoff in December. Its report came less than a day after the company announced an investigation into its finances that led to the resignation of its chief executive officer and chairman. The stock slumped more than 80 percent in the wake of Steinhoff’s announcement.

Deposits Surge

Capitec relies mostly on savings from its customers to fund lending. The bank’s retail deposits more than doubled in the last three years, soaring to 55.4 billion rand at the end of August up from 26.6 billion rand, according to its financial statements. Deposits increased 27 percent in fiscal 2017 alone, outpacing the 10 percent expansion in loans, which grew to 45.1 billion rand.

The rapid growth of deposits allowed Capitec to cut its debt to 7 billion rand from 11.1 billion rand in the same period. Its biggest rival, African Bank Investments Ltd., went bankrupt in 2014 after posting record losses, causing funding from bond investors to dry up, while the lender didn’t have a deposit base to fall back on.

About 6.3 percent of Capitec’s gross loans and advances were past due at the end of fiscal 2017, a number Viceroy says isn’t credible given that other unsecured lenders such as Bayport Financial Services South Africa Ltd. have rates of around 30 percent.

‘Smoking Gun’

Bad-loan impairments jumped 37 percent to 5.45 billion rand in the 12 months through February last year, according to Capitec’s latest annual report. The increase was caused mainly by changes to its rescheduling policies, in which customers were prevented from rolling over loans for a second or third time if their risk was too high, the lender said.

Viceroy said there could be about 2.5 billion rand to 3 billion rand of defaulted loans payable in 2017, but instead refinanced through new loans. The lender’s total loan book stood at 45 billion rand at the end of February.

“This type of loan renewal would be concerning, but not a smoking gun, at any other commercial bank,” Viceroy said in the report. “However, Capitec being a retail microfinance lender, carrying forward small, unsecured retail loans represents much higher credit risk.”

The report also argued that Capitec may have to refund fees charged on loans if it loses a lawsuit brought by Summit Financial Partners, which helps consumers work their way out of debt. Summit in 2016 accused Capitec of breaching the National Credit Act, which says that banks engages in “reckless lending” if they issue loans beyond what a customer can afford or don’t check whether clients fully understand the terms of the loan.

A spokesman for Summit Financial didn’t respond to an email or message left at his office seeking comment on Monday.

Capitec CEO Gerrie Fourie has vowed to fight the suit. Capitec assesses whether customers can repay loans and charges a proportional initiation fee for the service, he said at the time.